The late American investor Philip Fisher once said that regularity and dependability are the most important but least discussed aspects of dividends. He believed that consistent, progressive dividend policies were more appealing than a stock that simply offered a high yield. Indeed, a long history of research shows that progressive dividend growth is not only a signal of confidence but it can also produce some of the best long-term returns.
Fisher’s scepticism of high yield was based on the fact that eye-catching yields are often attached to troubled companies. Having lost the faith of the market, their prices sink lower, causing their yields to rise. These so-called dividend traps are often on the cusp of cutting their payouts.
By contrast, companies with a track record of growing their dividend payouts are often thought to be signalling confidence in future earnings. Fisher wrote in his book, Common Stocks and Uncommon Profits: “The managements whose dividend policies win the widest approval among discerning investors are those who hold that a dividend should be raised with the greatest caution and only when there is great probability that it can be maintained.”
Value of dividends
There are good reasons why strong, sustainable dividends are highly sought after by income investors. Back in 2002, research published by UK academics Elroy Dimson, Paul Marsh and Mike Staunton showed that while year-to-year investment performance is driven by capital gains, the lion’s share of long-term returns actually comes from reinvested dividends. They showed that over 100 years, an investment in the market portfolio with dividends reinvested would have produced 85 times the wealth generated by the same portfolio that only relied on capital gains.
With this in mind, Stockopedia created a mid-cap Dividend Growers screen for Interactive Investor. It looks for FTSE 350 companies with dividends that have been increased for at least five years and are forecast to grow next year too. Each company also needed a record of growing earnings by more than 10% compounded annually over the past five years. The overall list is sorted for yield.
| Name | Yield % Rolling | Dividend Growth Streak (Years) |
Forecast Dividend Per Share Growth % |
5-year EPS Compound Growth % |
| Aberdeen Asset Management | 5.68 | 9 | 8.16 | 29.8 |
| BAE Systems | 4.43 | 9 | 1.96 | 13.4 |
| Imperial Tobacco | 4.26 | 9 | 10.0 | 17.9 |
| PayPoint | 4.15 | 9 | 20.4 | 11.9 |
| William Hill | 3.31 | 6 | 3.36 | 11.6 |
| Inmarsat | 3.30 | 9 | 6.76 | 14.9 |
| Elementis | 3.25 | 5 | 80.2 | 52.9 |
| Morgan Advanced Materials | 3.24 | 5 | 3.97 | 16.2 |
| Big Yellow | 3.23 | 5 | 13.9 | 49.1 |
| Laird | 3.22 | 5 | 4.87 | 30.3 |
The yields on offer range from 5.7% at fund manager Aberdeen Asset Management (ADN) to 3.2% at technology company, Laird (LRD). Aberdeen, BAE Systems (BA.) and Imperial Tobacco (IMT) have the longest dividend growth streaks, at nine years apiece.
By far the greatest forecast increase in dividend per share is at chemicals company Elementis (ELM), which is expected to raise its final payout by 80% to around $0.16 for the 2015 financial year. Interestingly, Elementis has the strongest earnings growth rate over the past five years, which has driven the dividend growth, although brokers are forecasting a fall in earnings next year. Other shares here that have managed double-digit medium term earnings growth in tandem with strong forecast dividend growth include payment processor PayPoint (PAY), bookmakerWilliam Hill (WMH), satellite operator Inmarsat (ISAT) and self-storage company Big Yellow (BYG).
A sign of confidence
A long dividend growth streak is a useful tool for the income investor for two key reasons. Firstly, it can offer and indication of how sustainable a dividend is and whether the payout might be at risk. In addition, the dividend streak can give growth company investors an insight into the confidence of a management team and whether they expect earnings to grow in the future. Dividends, of course, can be cut at very short notice when things go wrong with a company, so careful research is needed. But in the search for dividend safety and earnings growth, a strong track record could be a useful place to start.
About Stockopedia
Interactive Investor’s Stock Screening series is written by Ben Hobson of Stockopedia.com, the rules-based stockmarket investing website. You can click here to read Richard Beddard’s review of Stockopedia.com and learn more about the site.
● Interactive Investor readers can enjoy a 2 week free trial and £50 discount to Stockopedia using the coupon code iii014 – click here.
● To learn more about Ben Graham and his deep value investing strategies, you can download the FREE Stockopedia book, How to Make Money in Value Stocks
It’s worth remembering that these and other investment articles on Interactive Investor are simply for generating ideas and if you are thinking of investing they should only ever be a starting point for your own in-depth research before making a decision.
*No fee for publication is involved between Interactive Investor and Stockopedia for this column.
About the author
Ben Hobson is Investment Strategies Editor at Stockopedia.com. His background is in business analysis and journalism. Ben researches and writes regularly on investment strategy performance and screening ideas for Stockopedia.com. He is the author of several ebooks including “How to Make Money in Value Stocks” and “The Smart Money Playbook”.
This article is for information and discussion purposes only and does not form a recommendation to invest or otherwise. The value of an investment may fall. The investments referred to in this article may not be suitable for all investors, and if in doubt, an investor should seek advice from a qualified investment adviser.